In 2019, SoftBank’s mega-investment shook the markets globally. Not even the UK’s growing fintech startups sector was spared. Reports reveal that the Japanese company’s $100 billion Vision Fund spearheaded two deals accounting for 25% of the capital acquired by the country’s financial startups.
The Bank’s mega transactions in technology companies have caused jitters among some investors about the valuations of these companies. Commentators also wonder whether the firms in SoftBank’s portfolio have too much money.
Last year, the Vision Fund invested $800 million in Greensill. It followed that with $440 million in OakNorth, two London-based business lenders, as reported by industry group Innovate Finance. The two investments accounted for a quarter of the $4.9 billion raised by financial startups in Britain in 2019.
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Lately, SoftBank and Vision Fund have attracted a wave of investor and media scrutiny. Masayoshi Son, SoftBank’s founder, has a savvy bet in 2000 on Alibaba. Alibaba went on to become an e-commerce behemoth in China worth over $600 billion currently.
Recently, Son and his associates have sunk billions of dollars in cash-burning startups. In that context, the Fund pushed portfolio companies late last year to expand aggressively despite huge losses.
Any company associated with SoftBank still has a definite ‘halo effect’ according to OakNorth CFO Cristina Alba Ochoa. Vision Fund, together with its portfolio, has many valuable connections to business opportunities and executives worldwide. During an industry event hosted by Innovate Finance Ochoa said:
“In the last year, they made introductions to banks and financial institutions outside the UK that we wanted to meet. They introduced us at the right level.”
OakNorth and Greensill claim they are profitable as opposed to many other unicorns that have emerged in recent years. Profitability seems rare after some privately funded companies get shocks from the public markets.
One of SoftBank’s biggest investments, WeWork, shunned its IPO plans in 2019 after Wall Street scrutinized its financials keenly. A direct-to-consumer mattress company, Casper, last week listed on the New York Stocks Exchange (NYSE) at a valuation that was almost half of what the venture capital investors had assigned it.
This gap in valuation shows a weakness that thrives in the private markets. Mark Tluszcz, the CEO at Mangrove Capital Partners, commented:
“They are a very inefficient pricing mechanism. One person defines the price. Not a lot of scrutiny.”
In the $800 million Greensill deal in May 2019, only one investor was involved, and the firm had a privately determined $3.5 billion valuation as highlighted by PitchBook data.
On the contrary, Citigroup’s stock traded over 250 million times on NYSE in December. Interestingly, Greensill also acquired $655 million of convertible debt financing in October 2019 from SoftBank.
Another issue that arises is whether the enterprises supported by the Vision Fund have excess disposable money. SoftBank’s firms can be enhanced with hundreds of millions of dollars in capital. If they are fortified, it can enable them to surge ahead of their competitors. Masayoshi Son stated:
“If people can grow and they have room to grow, I think money can be very useful. Historically whatever the revolution was, always money was necessary.
This investment strategy can also backfire. One dog-walking startup, Wag Labs, reportedly sought $75 million in funding. In the end, it got $300 million from Vision Fund.
Wag Labs decided to invest the extra funds internationally by adding services like dog grooming. However, that expansion (paywall) never succeeded, and it fell behind rivals.
Although Vision Fund is known for its misses, chief executive of SoftBank Investment Advisers, Rajeev Misra, has a different opinion. He said that the Fund has 50 winners in its portfolio. By the end of 2019, the Fund had invested in 88 companies.
Misra highlighted that at least a dozen of the Fund’s investments might seek IPOs in the next 18 months. He was speaking at an Abu Dhabi conference.
Greensill and OakNorth are confident that they can handle the tall stack that comes with SoftBank cash. The chief marketing officer at working-capital lender Greensill, Joe Hyland, said:
“Our goal is to continue to be profitable but at extremely high growth rates. Having the money and having all this dry powder in reserves for international expansion, for acquisitions, is important.”
In spite of the many benefits, could SotfBank’s investment have become a distraction? The CFO at OakNorth said that it depends on whether the acquired money is spent wisely and whether it will alter a company’s outlook.